RPM International Inc (RPM) 2012 Q1 法說會逐字稿

Welcome to RPM International's conference call for the fiscal 2012 first quarter. Today's call is being recorded. This call is also being webcast, and can be accessed live or replayed on the RPM website at www.RPMInc.com.

Comments made on this call may include forward-looking statements based on current expectations that involve risks and uncertainties, which could cause actual results to be materially different. For more information on these risks and uncertainties, please review RPM's reports filed with the SEC.

During this conference call, references may be made to non-GAAP financial measures. To assist you in understanding these non-GAAP terms, RPM has posted reconciliations to the most directly comparable GAAP financial measures on the RPM website.

Following today's presentation, there will be a question-and-answer session. (Operator Instructions). Please note that only financial analysts will be permitted to pose questions.

At this time, I would like to turn the call over to RPM's Chairman and CEO, Mr. Frank Sullivan, for opening remarks. Please go ahead, sir.

Thank you, Shaquana. Good morning, and welcome to the RPM International Inc investor call for the first quarter of our 2012 fiscal year. On the call with me this morning is Bob Matejka, RPM's senior vice president and chief financial officer, and Barry Slifstein, our vice president and controller.

We are pleased with the results of our first quarter ended August 31, 2011. RPM's entrepreneurial structure and strategy, which allows for quick decisions and adjustments to market conditions and opportunities, combined with the deliberate balance between businesses serving consumer and industrial markets, were both critical elements to our ability to generate double-digit sales and earnings growth, despite the choppy economic conditions in our core markets, and another quarter of significant raw material cost challenges. Our high-performance industrial coatings product lines generated strong growth, given the continuing rebound in industrial maintenance and capital spending, as well as their broad global market presence.

It is clear to us that our Building Solutions Group product lines are gaining market share in a number of areas, as its modest sales and earnings growth in the quarter is much stronger than the underlying fundamentals of the new home and commercial construction markets, both of which remain depressed. New product introductions and certain market share gains led to an uptick in our consumer segment business growth in the quarter as well.

I'd now like to turn the call over to Bob Matejka, to provide more details on our first-quarter results, after which we'll provide comments on our outlook for the balance of the year, and take your questions. Bob?

Thanks, Frank, and good morning, everyone. Thanks for joining us on today's call. I'll review the results of operations and cash flow activities for our fiscal 2012 first quarter, touch upon a few August 31 balance sheet measures, and then I'll turn it back to Frank for closing comments before we take your questions.

Starting with fiscal 2012 first-quarter results, consolidated net sales increased 10.2% year over year to $985.9 million, driven by price increases of 2.8%, volume improvement of 2.3%, acquisition growth of 1%, and favorable foreign exchange rates of 4.1%. The industrial segment net sales of $667 million, which account for approximately 68% of sales, increased 10.7% over last year, with favorable price of 2.6%, volume improvement of 1.5%, acquisition growth of 1.6% and favorable foreign exchange movements of 5%. At the consumer segment, net sales of $318.9 million increased by over 9% from the prior year, with 4% attributable to unit volume growth, 3.2% from positive price and 2% as a result of favorable foreign exchange rates.

Our consolidated gross profit increased to $409.6 million, from $375.4 million last year, principally due to volume and price increases. As a percent of sales, gross profit declined by 50 basis points to 41.5%, due to continued increases in raw material costs.

Consolidated SG&A increased 7.8% to $273.1 million, due to variable cost increases associated with our higher sales volumes. As a percent of net sales, SG&A decreased to 27.7% of sales from 28.4% last year, a reduction of 70 basis points, principally due to better overall leverage on the higher net sales.

Earnings before interest and taxes increased 11.9% to $136.5 million this year, from $122 million last year, due to the higher sales volumes, realized price increases, and improved SG&A leverage, the combination of which were partially offset by higher raw material costs. As a percent of sales, EBIT improved from 13.6% last year to 13.8% this year.

At the industrial segment, EBIT increased 10.9% to $92.5 million from $83.3 million a year ago, driven by 10.7% increase in sales, combined with stable SG&A leverage, which partially offset higher raw material costs. As a percent of net sales, industrial EBIT improved slightly from 13.8% last year to 13.9% this year.

Consumer segment EBIT increased 5% to $51.5 million, from $49 million last year. As a percent of sales, consumer segment EBIT decreased to 16.1% from 16.8% last year, as a result of higher raw material costs, and an inability to completely offset those higher costs with better SG&A leverage. The corporate and other EBIT costs decreased to $7.5 million for the year, from $10.4 million in fiscal 2011, principally due to an insurance reimbursement, which was partially offset by higher compensation and benefit expenses, and an increase in acquisition expenses year over year.

Our interest expense increased from $16 million last year to $17.8 million this year, primarily due to the issuance of an additional $150 million of debt in May of 2011, combined with a higher average interest rate year over year. Investment income decreased $2 million year over year, as a result of net realized losses taken on the sales of investments this year compared to gains recognized for the same period a year ago.

The income tax rate of 29.8% for the quarter compared to last year's rate of 30.5%, principally due to changes in jurisdictional mix of actual and forecasted earnings, the impact of certain foreign operations on our U.S. taxes, and adjustments to certain tax valuation allowances. Further, the 29.8% rate for the quarter reflects one-time benefits due to net changes in tax reserves, and a reduction in the UK's tax rates. For the last 9 months of fiscal 2012, we expect the tax rate to approximate 31%. The bottom line net income attributable to RPM shareholders increased 11.3% to $76.8 million or $0.59 a share, compared to last year's $69 million, and $0.53 a share.

Looking at balance sheet and cash flows, we find capex of $4.9 million for 2012 fiscal year compared to $3.3 million for fiscal 2011. Depreciation and amortization expense decreased slightly to $18.1 million, compared to $18.2 million a year ago. Cash from operating activities for the quarter of $7.5 million compared to $41.1 million last year. Increases in working capital attributable to the higher material cost and significantly higher sales growth were the main factors attributable to this decrease. Our accounts receivable DSO was 62.6 days compared to 59.7 last year, and days of inventory was 77.4 compared to 73 days a year ago.

Finally, a few comments on our capital structure and overall liquidity. As of August 31, 2011, total debt was $1.1 billion, compared to $935.8 million last August. On May 24, 2011, we sold $150 million aggregate principal amount of 6.125% notes, which were a follow-on issuance of our $300 million aggregate principal amount of 6.125% notes due in 2019, and originally issued on October 9, 2009. The offering price was at a premium, and had an effective yield to maturity on this $150 million follow-on of 4.934%. The proceeds will continue to be used for general corporate purposes.

Our net-debt-to-cap ratio was 36% at August 31, 2011, compared to 38.6% a year ago. And our long-term liquidity at quarter's end, August 31, was $834 million, with $373 million in cash, and $461 million available through our bank revolver and receivable securitization facilities.

With that, I'll turn the call back to Frank Sullivan.

Thanks, Bob. Economic conditions remain volatile and uncertain, especially in parts of Europe. Furthermore, while foreign exchange translation was a positive contributor to our first-quarter results, the rise of the U.S. dollar against other currencies will likely make foreign exchange translation a negative to our results for the balance of the 2012 fiscal year. On the positive side, we're seeing early signs of a slowdown in what has been a rapid and dramatic increase in raw material costs over the last few years.

Additionally, our work over the last 18 months to recharge our acquisition growth is starting to pay off, with the announcement this morning of the Grupo PV fireproofing business acquisition in Europe. In the first four months of our 2012 fiscal year, we have completed four transactions whose combined annualized sales total about $120 million. We believe any relief in raw material costs, combined with the benefit in the second half of our 2012 fiscal year of these new RPM companies, will more than offset weakness from poor economic conditions or hits from foreign exchange translation.

Results so far this fall indicate a second quarter that will show 8% to 10% sales growth. While we should generate good operating earnings growth from a bottom line perspective, you need to keep in mind the $7.5 million of one-time non-operating gains we highlighted in last year's second quarter, which we do not expect to be repeated this year. As well as one-time hits to earnings from the transaction costs and inventory write-ups of the Legend Brands and Grupo PV deals, both of which were completed in the early parts of our second quarter. Given the fact that the four transactions completed so far this year were essentially paid for with U.S. and European cash, these acquisitions should be nicely accretive to sales and earnings in the second half of our fiscal year.

That concludes our prepared remarks. We would now be pleased to answer your questions.

(Operator Instructions). Your first question comes from the line of Jeff Zekauskas representing JPMorgan. Please proceed

Good morning, this is Silke Kueck for Jeff. How are you?

Good morning, Silke.

I have a couple of questions. The sales from the recent acquisitions of $120 million would add something like 3% to 4% to sales growth. Is that embedded in the 8% to 10% forecast, or that would be in addition?

I think that will be in addition to our original forecast, particularly in the second half of the year, and again, that $120 million is an annualized figure, so we ought to have on a fiscal year basis, about eight months of those businesses this year.

Okay. Secondly, how much were your raw material costs up this quarter and is your expectation that's embedded in the earnings guidance that they'll just be flat for the remainder of the year, or that in fact they'll step down, and by how much?

As you saw in our gross margin in the quarter, our raw material costs were up pretty significantly again, it really depends on the different categories. We were able to pass on an average of about 3% in price, which was not enough to cover the raw material cost increases that we received versus last year and maintain our margin. Our expectation for the balance of the year is that raw material costs would remain relatively flat from where they are today. And so that means we're likely to see some year-over-year comparison challenges in the second quarter, but I think we'll start to see some margin improvement in the second half of the year, assuming that we don't see another step-up again in raw material cost increases, which at this point, we do not anticipate. But we also do not anticipate any meaningful reduction in raw materials in our forecast.

My last question, and I'll get back into queue. The 4% volume improvement in the consumer business, can you talk about what the pockets of strength were?

Sure. In our Rust-Oleum business in particular, we have introduced a number of new products, which are selling well. Some of them at very high retail price levels- countertop refinishing products, which are kits, kitchen cabinet refinishing products, which are some exciting new product categories that are ticket items in the hundreds of dollars per SKU, which is pretty unique in our space. We have also regained some market share in certain specialty primer areas, as well as taking some market share in a number of retail discount accounts as well.

Thanks very much.

Thank you, Silke.

Your next question comes from the line of John McNulty, representing Credit Suisse. Please proceed.

Good morning. Just two quick questions.

Good morning, John.

On the volumes in industrial, they seemed actually a little bit lighter than I would have expected, especially given some of the strength in parts of the business that you had highlighted, like the high performance corrosion control, et cetera. I guess I'm wondering which parts aren't doing particularly well, maybe beyond just the commercial construction-related stuff.

It's a little bit of a mixed bag. We still have a number of high performance coatings product lines that are growing in the low single digits, which is probably a high single-digit unit and 2% to 3% price. We did have some weakness in a couple of areas in Europe. In particular, our Tremco illbruck business, which had very strong results last year, has had some tough comparisons and is suffering from some regional slowdowns in renovation and construction markets in certain parts of Europe.

And the comments that I had made earlier really relate to the U.S. construction markets, where we're seeing some very low single digit improvement in sales and earnings which I think indicates we're picking up some market share, because the underlying dynamics are still pretty depressed. So it's been a little bit of a mixed bag across our businesses, and I would say the biggest weaknesses are in a number of industrial businesses in Europe.

Okay. Great. And then with regard to the surge in sales that you saw in August, that was one of the reasons I guess free cash was a little bit light, what do you think drove all that demand? It just seems odd to see such a big pick-up.

I wish I had a good answer for you, and I know there are good answers out there across all of our businesses. We just saw a good pick-up, particularly in our roofing and waterproofing businesses, again in our Carboline coatings business, our Fibergrate business, all of which had strong finishes to the quarter. It's been relatively choppy economic conditions, and so region by region we're seeing some differences. And also in the quarter, fortunately, we had two good months, but we also had a weak month. As I commented in my prepared remarks, early signs in the fall would indicate, on a consolidated basis, that we're going to see that 8% to 10% growth here this fall, pretty consistent with the spread in segments that we're talking about.

Okay. Fair enough. Just one last question, just on the Legend Brands group acquisition that you had made.

Yes.

When I kind of look through the description of it, it looks like there may be a services component to it as well, and I guess I'm wondering first of all, if that's true, and second of all, is this maybe a subtle change in direction, and should we think about further acquisitions kind of tied into the services side of things for RPM going forward?

Sure. When you think about RPM and acquisitions, first of all, after really slowing down during the recession, we spent 18 months trying to reconnect and rebuild that pipeline of what's been a critical part of our growth strategy for 30 years. And I think we're just hitting our stride, having completed four deals so far this year. Fundamentally, whether it's a product line or a free-standing business, if it's a North American consumer product, it's likely to be part of DAP or Rust-Oleum. High performance coatings that serve, in particular, steel or concrete markets, flooring markets will be part of our Performance Coatings Group. And then obviously, waterproofing, construction chemicals, sealants, would be part of our Building Solutions Group. So those are all of the typical RPM products and markets that you would know.

We have a group called RPM2, [led by] Mike Tellor, who had spent a good part of his career at RPM. He was at Carboline, came up through those ranks, was executive vice president there, ran some businesses for them and then took over leadership at Rust-Oleum, when we acquired Rust-Oleum in 1994. He retired a few years ago. He came back to run our RPM2 Group with the goal of taking a group of kind of hodgepodge businesses that don't fit those other categories, and specialty chemicals, in kind of a flavors and fragrances and food business and our MBZ business, which is the producer of NatureSeal. So NatureSeal is the reason that you can get sliced apples or apple fries at some of the fast food restaurants. That's our product that is patented in conjunction with the U.S. FDA.

His goal, and our goal, is to take that very unique kind of specialty chemical collection of businesses to $1 billion in the next so many years. And so that is where you're likely to see some categories that are in adjacent areas, but not the most obvious fits with what typically would fit with our other businesses. Legend Brands, I think, is a great example of that. They manufacture equipment and provide services and processes, as well as chemicals, for cleaning and restoration for smoke, fire and water damage, and we're pretty excited about that business.

In fact, some of their divisions were actually purchasers of certain specialty Zinsser primers that were used in smoke and fire damage. They were also producers and users of carpet and upholstery cleaning chemicals that we're familiar with, from our Chemspec business. But they are in the service and equipment manufacturing for aggressive dehumidification, and/or restoration in smoke, fire and water damage circumstances. So it is a new category. You should expect to see us in businesses that are similar or adjacent, but quite different from the normal fits of consumer rust preventatives or specialty coatings for concrete or steel, and Legend Brands fits that category.

Great, thanks very much for the color.

Thank you.

Your next question comes from the line of Kevin McCarthy, representing Bank of America-Merrill Lynch. Please proceed.

Good morning, this is Aleksey Yefremov for Kevin.

Hi, Alex.

Hi. What kind of trends do you see so far for September? Is it typical seasonality? A little better? A little worse?

As I mentioned in my prepared remarks, early signs in the fall is that this kind of 8% to 10% revenue growth is continuing, and so we're seeing that. I think that while we're seeing some slowdown in raw material increases, the year-over-year comps will still challenge us at the gross margin level, so we're paying sharp attention to SG&A expenses. But so far in the quarter, we are -- as of today, we are sitting pretty much the same in the early months of our second quarter that we experienced in the first quarter of this year. And that's consistent across both of our segments.

Got it. Thank you. And your press release mentions fiberglass reinforced plastics; that product line was strong. Could you talk a little bit about end markets there and what's driving that strength?

Sure, we wholly own a business called Fibergrate, which has manufacturing in Texas and a small manufacturing facility in Mexico, and we also have a significant investment of about 23% in one of the world's leading composite manufacturers and producers in Kemrock in India. The markets that those serve are oil and gas for platforms, windmills, stair treads, all kinds of structures that you might think of for platforms or around industrial settings, in particular oil and gas, where corrosion is a real issue.

The wind market is also an area of support and then just railings, general industrial-type of structures is kind of their end-use market. And so we're seeing, again in oil and gas and mining and in general industrial, not only in Fibergrate, but across a lot of our businesses, a pick-up in industrial maintenance spending and in industrial capacity expansion -- not so much new bricks and mortar, but capacity expansion in our industrial markets that we serve globally and that's what's driving the Fibergrate strength so far this year.

Final question, if I may. On the consumer pricing, it looks like it picked up to above 3% versus 1.3% last quarter. Was this a positive mix shift or you actually raised prices?

No, our mix is probably a little bit negative in consumer and we've been able to raise prices but not enough, or timely enough, to cover our raw material costs. So, as you saw in the quarter, we had some further margin deterioration at the gross margin level. It's challenging to get sufficient price increases from major retail customers. We are getting price increases, but it's clearly not at the level to both pass on our raw material costs and maintain our margins.

And the other bigger challenge there is timing. There's a process to go through in terms of getting price increases at major retail accounts. In our industrial businesses, we can change pricing literally daily, and if you overshoot your pricing, particularly on products that are sold through distribution or sold through thousands and thousands of customers and you sense you're losing some share, you can adjust your pricing rather quickly as well. So we just have more pricing flexibility and more pricing agility in our industrial segment than we do in our consumer segment, and that's been true really throughout our history.

Great. Thank you.

Your next question comes from the line of Saul Ludwig, representing Northcoast Research. Please proceed.

Good morning, guys.

Good morning, Saul.

The volume growth that you had in consumer was very impressive. To what degree do you think that represented a true ultimate consumer take-out, or you alluded to a lot of new products and I wonder if some of that 4% volume growth might have been one-time pipeline filling?

This is just a guess, Saul, but I would bet that about half of it is either market share gains or new products, and the other half of it is consumer take-away. I think we're seeing after a -- even though the housing market in terms of new construction is still dead, I think we're seeing consumers start to spend on small project redecorating and getting back to the type of regular patch and repair and maintenance around their homes that in the heat of the recession, shocking to us, small ticket item basic maintenance and repair and small project redecorating products were not moving. And, in fact, we were seeing negative comps in ways that we had never seen in our history and it was just kind of the shock of people not going to stores.

So we think we're slowly getting back to that just kind of regular home maintenance, repair and small project redecorating that's kind of the backbone of our Rust-Oleum and DAP brands. And so there is positive momentum there, albeit relatively modest. And then the balance is market share gains and new product introductions.

Could you elaborate a little bit on the market share gains at the big boxes, what products and where?

We have picked up small project paint at a major retail customer that we did not have before. And we also picked up some market share gains with a number of our specialty primers and some of our major accounts, and then we've also picked up some shelf space with some new products in a couple cases, brand-new products like these countertop refinishing or kitchen cabinet refinishing products.

But Rust-Oleum in particular has introduced this year some high-end, high-quality and relatively high-priced driveway sealer products, which is pretty exciting for us. They're selling quite well. They're picking up market share from what's kind of older asphalt-based technology that doesn't perform as well. It's at a higher price point. And it's the first SKU in major retailers by Rust-Oleum in their building products area, as opposed to the small project area, small project paint. And so it's exciting to begin to have some products that have decent consumer take-away in a whole new segment of some of our major customers.

Good. I have a question for Bob. How much was the one-time tax benefit in dollars that you had in the first quarter?

That would probably be something like a $2 million.

$2 million?

That's a high rounding. Say $1.5 million.

That's about $0.01 a share; right?

Yes. If you want to get back to -- keep in mind, Saul, our base rate is 31%. We believe we're going to have a 31% rate and that we had some benefits that knocked it down to 29.8% I think.

And then when you look at the balance of the year, last year you had a lot of investment income as your insurance companies were selling stocks at gains and they're certainly in the base of your earnings last year. Given what's going on in the equity markets, how are you sort of putting your own forecast together, how should we think about those comparisons in your second, third and fourth quarters, where you had big investment income last year? How should we think about that modeling for this year?

I think year-over-year, Saul, we had about $9 million and it was all in the back half of the year of pretax investment gains, non-operating. It was principally in Q2 and Q4, and we highlighted those in the calls last year. As I just mentioned on my prepared remarks, folks need to keep in mind that there were about $7.5 million of one-time non-operating gains in the second quarter last year that were a combination of investment gains as well as insurance recoveries. Big picture, though, we run these captive insurance businesses, which has been a very smart risk management move for us. And in normalized markets, the gains and losses are relatively non-meaningful and that's why we haven't talked about them. I suspect we'll get back there.

It's worth keeping in mind that the Dow went from 13,000 down to 6,500, and that's what drove a year of a lot of negative hits and write-offs and mark-to-markets. And then once you mark those to market, we had some gains last year as we had the normal kind of turnover in those portfolios, either for investment balancing and/or creating liquidity to meet various insurance costs. When you -- we won't have that $9 million of gains again this year, but the Dow hasn't been cut in half and I suspect when we get back to regular swings of up and down, these issues will be non-events from one quarter to the next as we go forward.

Then just finally, you did mention it in the second quarter, you're going to have some costs with inventory mark-ups, et cetera, with regard to the acquisitions. What magnitude of those costs should we be thinking about including in our second quarter?

I don't know off the top of my head, but certainly there will be a couple million dollars of acquisition transaction costs. And in particular what I don't have a good sense for, but they're really one-time, would be the required for accounting purposes inventory write-up, which you take through your P&L. It's a one-time hit, and I really don't have a good sense of either Legend or Grupo P&V, which is a $20 million fireproofing business that we acquired in Europe and announced this morning. So both of those will have some negative impact on the inventory write-up, but that's a one-time hit, which won't impact the second half of the year. And from that perspective, you're looking at acquisitions that will be additive to both sales and earnings, as we've essentially traded non-earning cash in Europe and the U.S. for some nice strategic transactions.

Great, thank you very much.

Thanks, Saul.

Your next question comes from the line of Edward Yang, representing Oppenheimer. Please proceed.

Thank you. Good morning.

Good morning, Ed.

Starting out with a modeling question, can Bob break out the SG&A and cost of goods sold by consumer and industrial?

We could give you some color on that. But neither we nor any of our competitors provide segment reporting at the gross profit level. It was brought to our attention that we were the only ones that were doing it for a period of time. It's not required by the SEC and in fact few if any public companies provide it. We would be happy to provide cost of goods sold by segment and gross profit margins by segment at the point at which you thought that was appropriate information that all of our competitors should provide.

Maybe we could just handle that offline, then. We don't need to get --

I think we would -- we could provide you and I think Bob could provide you now with some of the color that we did provide in terms of raw material costs, pricing and certainly SG&A. I mean, our SG&A was restrained, and grew at levels less than revenue growth, and that's why we have improved our EBIT margins. But as we commented, raw material costs rose more than our ability to pass it on in price, and more than we could leverage to the bottom line and so you looked at, on a consolidated basis, a gross margin that slipped again. Per our pricing discussions, our gross margins tend to be hit a little bit harder in this type of environment in our consumer segment than in our industrial segment.

Okay. And talking about raw materials, Frank, you mentioned in the coming quarter that revenues are tracking up about 8% to 10% but at the same time, you mentioned some things that could probably hurt you on the EPS side -- for example, the $7.5 million in gains that you saw last year. You mentioned the raw materials. I think interest expense should also be up for you year over year. So basically what kind of EPS growth does that show for the fiscal second quarter? Is it going to look kind of flattish versus the 8% to 10% top line growth?

Yes. As you know, Ed, for since about 2002 we've gotten away from quarterly guidance and just stuck with our annual guidance. And I think to your question, as well as the question asked earlier by Saul Ludwig, when you look at the $1.45 we did last year, and our guidance, which is essentially $1.60 to $1.65 for this year, it's stronger originally than it appears because last year did incorporate about $9 million throughout the year pretax gains, which we don't expect to repeat. And certainly those $9 million were contributing to the $1.45.

I mentioned the $7.5 million of one-time non-operating gains in the second quarter. Just to remind people, we highlighted those last year. We won't repeat them this year. And so while 8% to 10% sales growth should drive some nice operating profitability, that operating profitability will be negatively impacted on just the straight EPS line by not repeating that $7.5 million of one-time gains as well as a few million dollars in inventory write-ups, which again are one-time associated with these second quarter acquisitions. I think that's as much color as we would like to provide as opposed to actually getting into earnings per share for the quarter.

Got it. On the industrial side, volumes slowed to 1.5%, it had been tracking at around 6.5%. Do you expect that to pick up for the rest of the year? How do you get to 8% to 10% revenue growth if industrial volumes are 1% to 2% growing?

Well, again, if you look at industrial as a whole, I think for the quarter, we were up about 9% or 10%. I think we would expect to see unit volume better for the balance of the year than that 1.5%. You are going to see the benefit of price because we were able to enact some price increases throughout the year last year that have not yet annualized. And the one area where we expect now to get hurt versus our original forecast is, we set FX assumptions about where rates were at the end of our fiscal year. And clearly with the strength of the dollar and particularly our exposure to the Euro, you're going to see that deteriorate, and most likely hurt us instead of help us.

So I guess in summarizing, we're going to have price and it's not new price, it's the annualization of price increases that we got last spring. You'll see better volume than what we showed in the first quarter in terms of unit growth. And we believe we'll more than offset the negative impact of foreign exchange hits by the acquisitions that we've announced. And so just to be very deliberate about that, we're very comfortable that we're going to hit that $1.60 to $1.65, but that is in typical RPM fashion of having some unexpected challenges, offset by the typical small- to medium-sized acquisitions that we've been doing pretty much every year for the last 30 years.

Just finally, on consumer, consumer revenue was up 9% year over year in the quarter, and just understanding the lumpiness of that -- first of all, did you see any hurricane benefit from that, or was that -- you mentioned some market share gains there, but could it also be some lumpiness on the order patterns of big box retailers last year, for example, you saw some lumpiness as well.

No, I think -- first, to the hurricane question, and it was an earlier question about what happened at the end of your first quarter.

Yes.

We did see some benefit in particular in our Tremco Roofing business, which is all in renovation and reroofing, from some hurricane spending, and so that's where that would typically show up in roofing or waterproofing products. Not so much that we can track in consumer markets. In fact, if anything, you get a slight hit as stores close or things hit, but it's hard for us to track.

I think the thing that's really driving our consumer business is a combination of the market share gains we talked about, as well as consumers starting to spend on basic household maintenance and repair, patch and repair, and redecoration. The $50,000 new kitchens and the $100,000 additions aren't happening, but people are getting back to redecorating, which is particularly good for us because our -- we're not in architecture paints, so new home construction or major renovation really wasn't driving our growth. But redecorating and small remodeling are really things that drive the DAP and Rust-Oleum type product lines.

Okay. Thank you.

Sure.

(Operator Instructions). Your next question comes from the line of Greg Halter, representing Great Lakes Review. Please proceed.

Thank you, and good morning.

Good morning, Greg.

I don't know if you mentioned this or not but I believe your corporate expense was down about $3 million year over year. If you could walk through that, I'd appreciate it. And maybe you did already, I may have missed it.

Yes. If you look at that, it's something like $2.9 million drop, Greg, and we did have an insurance recovery on a fire, which was a one-timer, which more than offset our typical increases that we have. Comp and benefits, as an example, you take them and they were probably up over $2 million, perhaps as much as $2.5 million. We did have some benefit from foreign exchange gains within the corporate area.

But basically -- another thing I would mention too, would be the acquisition cost. This quarter, they were down compared to a year ago, where we cut things back. So at any rate, you had the insurance recovery, which is a few million dollars more than offsetting cost increases, net value was about $2.9 million expense reduction.

Okay. And last quarter you mentioned the bankruptcy of I think one of the distributors. Anything new to report there?

No.

Okay. And it seems like there's been more acquisitions in the fire protection area, and I'm just wondering, what you view the market size of that opportunity and what kind of growth that area could conceivably deliver?

I don't have any information, Greg, on the market size. I can tell you that it is a strategic growth area in our Performance Coatings Group globally, and so we have been acquiring or developing new technology and new formulations for thin film intumescents, as well as commercial grade and industrial grade fireproofing products. There is an increased demand for those products globally as a result of some of the tragedies that have occurred over the last decade, whether it's New York or some of the Gulf fires in terms of oil platforms.

So there is a higher sensitivity in commercial and industrial markets for intumescent architectural coatings and/or commercial or industrial fireproofing. And we are aggressively developing both a complete line as well as a global presence in those product categories. And so we're pretty excited about this Grupo P&V acquisition that we announced this morning for Europe, because it complements what we're doing in our Performance Coatings Group and our Carboline business in those product categories.

Okay. And on the price side, obviously we've been talking about raw material costs stabilizing or hopefully at some point declining for years now. If that were to ever happen, what's RPM's history of giving back price increases that you've earned over the years?

Typically throughout our history, our margins have suffered in rapid raw material rising environments, and our margins have improved as raw materials have declined, and we seek to regain some if not all of the margin that we have lost. And I think it really goes to the nature of our products in terms of their leading brand position in certain categories. They're really small ticket items that aren't price-sensitive, and in other areas, they're specialty products that are a relatively insignificant part of a major construction project, but a critical part. For instance, specialty sealants and gaskets that hold a curtain wall, panes of glass in 40-story buildings and things like that.

So historically for us, we have seen margins under pressure in a rising raw material environment and seen margins expand as raw materials decline. The two caveats to that I would say is that we've never been in a period of time like we have in the last few years, where raw materials have risen as fast and as often as they have. And so that, in particular, depressed our gross margins. And then the second caveat is, in every instance, and this instance won't be any exception, we benefit as raw materials go down. But again, assuming they go down slowly so we're in an economic environment where our sales are maintained or continue to grow.

Okay. And as you mentioned, obviously you have been more active on the M&A front, and just wondered what your outlook is in terms of availability of companies as well as pricing.

I can tell you that acquisitions have generated about 50% of our growth over the last 30 years. I can also tell you that for six or eight years, I spent a lot of my time and energy dealing with risk management issues, and I'm not doing that anymore. And so we are in an environment kind of post-recession. I think the more discipline in the banking market and the private equity market that quite honestly had capital structures that were stupid. They were right up there with the ninja mortgage loans. These were covenant light, no covenant, highly levered transactions. And with more discipline in the banking market, and having been through the recession, we are back to valuation ranges that have been kind of the 30-year average. And we're spending more time in more places around the globe, looking for good, strategic acquisitions.

The ones that we've closed this year are good examples. Multispec is a $5 million product line that we will completely integrate into Rust-Oleum, very small but you have a great IRR. API is a specialty business that provides globally specialty flooring products and decking products for the cruise ship industry for large ocean-going vessels and military vessels. It's run by third-generation family members.

Legend Brands has a management team that has been there before they were owned by private equity, has stayed through that growth, and I believe is very excited to be part of RPM. They also could be a platform themselves for additional acquisitions. And lastly, the Grupo P&V business that we announced today will continue to be run by the owner-operators who sold us the business. So these are all right up our alley, good medium-sized transactions, very strategic in terms of the products and markets that we serve. And in light of the fact that we're trading non-earning cash so far for nicely earning businesses, we're pretty excited about their positive impact in the coming years to our sales and earnings growth.

Okay. And one last one. You've talked about the foreign exchange and obviously the impact on the top line was 4.1% for the company as a whole. How does that translate down into the operating income? Was that also impacted as much as a percentage basis, or are there some kind of maybe manufacturing offsets or so forth that may make that more or less I guess?

It really depends on the business unit. It does translate down to a certain extent to earnings. We have never disclosed that. Quite candidly, it's really hard to measure. It has virtually no impact on margins because your revenues, your cost of goods sold and your bottom line are all in the same currency in most cases.

In some of our European and other foreign area businesses, it's a little harder to manage, because they're doing business in the Middle East, they're doing business in the UK, they're doing business in the Euro zone, and so there is a mix of currency there. So it's hard to measure. I will tell you, our expectation for the balance of the year is that the benefit from foreign exchange will disappear pretty quickly. And in fact, if the dollar keeps strengthening, particularly against the Euro and the Canadian dollar, it could likely be a hindrance to our results for the balance of the year. As I indicated, I think we have other areas where we can more than offset that negative impact.

Great. Thanks very much for your answers.

Thanks, Greg.

Your next question comes from the line of Rosemarie Morbelli, representing Gabelli & Company. Please proceed.

Good morning, Rosemarie.

Good morning. Thanks for taking my question. I am a little confused about one thing, Frank. I think that you answered one question saying that your 8% to 10% growth, top line growth was excluding acquisitions. That was at the beginning of the call. But then I also think that you mentioned, unless I misunderstood, I also think that you mentioned that the acquisitions will actually affect a negative impact from foreign exchange. Could you clarify this a little bit for me, please?

Sure. I'll clarify our outlook for the year, which started at our expectations that our sales for the year would grow 8% to 10%, and our earnings would be in the $1.60 to $1.65 range. And I think we're still comfortable with both of those forecasts for the year. And it's a result of, in particular, expecting foreign exchange to not only not be a help to our results but at some point probably be a hindrance to our results, offset by the sales and earnings gains that we would expect, particularly in the second half of the year from acquisitions. And then whether we do a little bit better than that really depends on getting a feel for the seasonality of some of these acquisitions and their impact next year, as well as what happens with raw material costs.

Okay. And talking about seasonality, are they going to help in the third quarter, diminishing the negative seasonality you usually have there, or are they have the same -- they are going over on the same pattern?

Try as we might, Rosemarie, as we continue to focus on industrial or construction or even consumer products, in every case, they tend to have some exposure to weather. And so I don't think any of these acquisitions will hurt our normal seasonality, but none of them are going to be a significant booster from a seasonal perspective to our third quarter. Having said that, they certainly might add sales and we hope earnings in our third quarter, based on just the additional volume of business that we're going to get from these businesses. The third quarter's a hard one to know, because as you know, we generally break even or make $0.01 or $0.02. So the percentage impact from some of these acquisitions could look meaningful, because $0.01 per share or $0.02 per share in the third quarter appears to be a big percentage gain but it's really just $0.01 per share.

Okay. So I think you have answered my next question, which is that the acquisitions will be accretive on the top line, that is very clear, but will also be accretive to the bottom line in the second half of this year?

That's correct.

Only in fiscal 2013. Usually they are accretive within one year so I'm just trying to figure out whether this is happening earlier this time.

These will help us in the second half of this fiscal year. Principally, as I said, because we're trading non-earning Euros and non-earning dollars, basically cash in the bank that's earning nothing. So we have, I think, a pretty good sense of our cost of capital. Some of our compensation programs are geared towards improving our return on assets and targeting our broader cost of capital, but on a pure incremental basis, we've been able to utilize cash to acquire nicely-earning businesses. So in the second half of the year, they will be accretive to sales and earnings.

Okay. And could you give us a feel as to what Legend Brands' EBIT was in 2010?

We haven't disclosed that.

Now could be a good opportunity.

We hope so.

I meant disclosing it now on the call.

Historically, Rosemarie, have not disclosed the earnings of any of our particular subsidiaries, and other than discussing some of the margin profiles and earnings results of RPM on a consolidated basis or on a segment basis, we wouldn't disclose individual subsidiary profit profiles. But suffice it to say, we're interested in acquiring businesses whose margin profiles look like RPM, or where possible, better.

Okay. And then could you bring us up-to-date on what is happening in India regarding your ownership of the joint venture?

Sure. That's a good question that we didn't comment on. In the first couple of months of this fiscal year, we were able to increase our investment in Kemrock, which is a very quickly-growing, highly-successful Indian composite company, both in fiberglass reinforced plastics, now in carbon fiber resins and just a really dynamic business, and a great partnership and just a fun company to watch grow.

And we've increased our ownership from what was about 18% to what today is around 22% or 23% and so the good news there is having reached an ownership level in excess of 20%, we'll be able, for the first time this year, to reflect a minority interest through our income statement. And that should add somewhere in the neighborhood of $0.02 per share on an annualized basis. So, for this fiscal year, it will add, I would think, $0.01 or $0.02. And we'll have a better sense of that as we begin to consolidate their results, some of which -- not consolidate, but show their results on the equity method, but we do have to make some adjustments between their reported results and U.S. GAAP. So we'll have a better sense of that, I think, in the third quarter. But the best way to think about that is it will add probably a couple cents a share on an annualized basis, as long as we maintain an ownership interest in excess of 20%.

You expect that ownership to increase, or is your offering of buying back stocks done now? When you reached --?

Rosemarie, we're happy with our 23% ownership interest. If given the opportunity to increase that in the future, we would certainly consider that, but we are very happy to have grown from what was about a 5% ownership interest to what was 14.99% to 18% to now 23%.

Okay. That's great. Thank you.

Thank you.

Your next question comes from the line of Brian DiRubbio representing Y/CAP Management LLC. Please proceed.

Could you give us an update on SPHC, where you stand with that?

Sure. The SPHC process is ongoing. There's really no material change. As we've indicated in the past, those results have been deconsolidated from RPM. Those businesses themselves are doing fine.

They're generating some sales and earnings growth, which is nice for those businesses and the people that run them. But we are still in a 524g process or they are in a 524g process that is likely, from its start at May 31, 2010, to be a three- to five-year process. And other than that, there is nothing material to really talk about. Those businesses are not part of our results.

I understand.

And they're not part of our expectations or outlook for our current fiscal year, and a year ago we disclosed our goal of achieving $5 billion of revenues by 2015, and we believe we can do that without those businesses as well.

Is there any expectation before -- you're saying three to five years for the whole process, but is there any expectations that you'll be able to provide an update prior to that? Because we're about 15 months into this now.

Sure. Well, the wheels of justice grind fine, but they grind slow. I think we would provide an update or some type of release on a timely basis if and when there's anything material to report. But you're looking at a slow process, which on average for other similar filed circumstances, have taken about four years. And you're in a long, slow discovery process and motion process by both parties and I think that's where they are. I would guess that in most of these cases, material action probably happens in the last year of the process, but I really don't know. There is nothing material to report, and given the way the process is going, we wouldn't expect anything any time soon.

Okay. Thank you very much.

Thank you.

You have a follow-up question from the line of Rosemarie Morbelli representing Gabelli & Company. Please proceed.

Just quickly, Frank, when do you expect to have news regarding the dividend? Usually it is in October. When is the board meeting?

Our board meets tomorrow morning and we have our annual meeting of stockholders tomorrow afternoon, and that is typically the venue where we address dividend news. And if our board made the decision to increase our dividend, then we would announce that tomorrow afternoon. And if that were to occur, it would be our 38th consecutive year of increasing our cash dividend to shareholders.

Thank you.

And I might add, currently we have about a 4.5% yield.

Thanks.

At this time, there are no further audio questions. I would now like to turn the call back over to Mr. Sullivan for closing remarks.

Thank you. Tomorrow at 2.00 at the Holiday Inn in Strongsville, Ohio we'll host nearly 1,000 shareholders for our 2011 annual meeting. At the annual meeting, we will review our 2011 full-year and first-quarter fiscal 2012 results, as well as communicating, thank you Rosemarie, our board's decision on a possible dividend increase, which would be RPM's 38th consecutive annual increase of a cash dividend to shareholders. With a PE of 12, a 4.5% dividend yield and the prospect of another year of sales and earnings growth, we believe RPM is a compelling investment in this turbulent market. Thank you very much for your time on today's call. Thank you to all the RPM employees for your performance that's delivered these tremendous results. And thank you for your investment in RPM. Have a great day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.